Serbian competition watchdog hits SBB with allegations of abuse of dominant position

On 27 March 2018, the Serbian Commission for Protection of Competition (“Commission“) initiated investigation against Serbia Broadband (“SBB“), the largest Serbian cable distribution system operator for alleged abuse of dominant position by charging excessive prices. SBB raised prices of monthly cable distribution system maintenance and cable TV subscription fee for RSD 100, which is less than EUR 1, as of 1 January 2018. The Commission took a prima facie view that the price increase may be unjustifiable and not entirely caused by the operator’s costs increase.

Why SBB

Due to its strength on the relevant market, SBB has been under constant Commission`s scrutiny. According to the latest publicly available information, the market share of SBB on the relevant market of retail distribution of media content was in the period 2013-2015 in the 50-60% range. SBB is also active on the retail market of broadband internet access services, where it held a market share of 30-40% in 2015, and the retail market of fixed telephony services, where its market share in 2015 was 5-10%.

This is not the first time SBB is undergoing an abuse of dominance investigation. In 2007, the Commission opened proceedings on the excessive pricing charge but found no infringement. Also in 2007, the Commission determined promotional campaigns of SBB in the centre of Belgrade offering customers of other cable operators free services to switch to SBB constituted exclusionary abuse. In 2008, the Commission established that SBB abused dominance by concluding exclusive distribution agreements with TV operators via DTH technology. In 2011, the Commission received another complaint for excessive pricing which was dismissed as unfounded.

Excessive pricing law

That excessive pricing is a stand-alone infringement of antitrust law is not a universally accepted position. In US, excessive pricing by dominant undertaking is not prohibited as such but may be an element of another infringement, such as margin squeeze or refusal to deal. On the other hand, the courts within EU, including the General Court and the CJEU, have held that “imposing unfair purchase or selling prices” from Article 102 (a) TFEU includes a prohibition of excessive pricing.[1] Article 102 (a) TFEU has a direct analogue in Article 16 paragraph 2(1) of the Serbian Competition Act.

There is no universal definition of what constitutes excessive pricing either. According to United Brands case, price is deemed excessive if it has no reasonable relation to the economic value of the product supplied[2]. Although the exact meanings of the terms “reasonable relation” and “economic value” remain open, only “disproportionate” or “exorbitant” prices could be in breach of Article 102 TFEU[3]. A two-step analysis is required for purpose of establishing this infringement. As recently noted by Advocate General Wahl in opinion in the Latvian excessive pricing case C‑177/16 “firstly one has to determine whether there is an excess (that is a significant difference — between the price actually charged by the dominant undertaking in the relevant market and the price which that undertaking would hypothetically have charged had there been effective competition in the market (‘the benchmark price’)“. The next question is whether the difference in price is a result of an abusive use of market power by the dominant undertaking, or a consequence of other legitimate reasons such as increased cost of inputs, innovation or investments.

Regarding the first point of analysis, there is no unique legal test to determine whether the price is excessive. Amongst other, any of the following method are used:

price cost comparisons;

price cost comparisons to its competitors;

geographic price comparisons; and

comparisons over time[4].

Price cost analysis requires comparing the price charged for the product or service in question with an appropriate measure of the costs of producing the good or delivering the service. If the difference between price and cost is “excessive”—i.e., higher than a given benchmark— then the first part of the test is satisfied. The main issue and potential obstacle in the application of the price cost comparison is how to identify the right measure of costs (i.e. how to calculate incremental cost of production since there are various methods for the costs allocation). Comparing the prices dominant firm charges with the prices of its competitors may be useful but also has its limitations given that differences in price may simply reflect differences in quality, with higher quality products requesting a premium price[5]. Geographic price comparisons may encompass comparison of the prices of a given product charged by the same firm at different locations or comparison of the prices of similar products or services offered by different companies in different territories. To be applied properly, the geographic price comparisons shall accurately reflect different market conditions and intricacies of the local markets that impact the difference in price. If used, comparisons over time will show evolution of profitability, price-cost margins or prices over time.[6]

Regardless of which price comparison method is applied, it is well established in the EU case law that the price has to be significantly above the chosen benchmark.[7]

The challenge of proving an excessive pricing abuse

To prove the abuse of dominance in this case, the Commission will first have to establish that SBB is dominant on the market of retail distribution of media content. For this purpose, market shares of SBB will serve as an indication or starting point for the dominance/substantial market power analysis.

If it establishes the dominance, the Commission will have to prove that the price was indeed excessive (by using one or more of the methods mentioned above), and without objective justification so.

This is not an easy exercise. In addition to general difficulties in assessing whether a price is excessive and what is adequate benchmark, the structure of SBB costs is more complex than in the previous excessive pricing cases before the Commission, which involved a bus station local companies in 2007 and 2017[8] and public utility company operating funeral services in Belgrade in 2014[9].

Once the Commission finds the price is significantly above the relevant benchmark, it will proceed to the second stage of the analysis which is an investigation into whether the price increase was a result of an objectively justified cost increase. SBB may defend its pricing change by showing additional investment or increased costs of inputs (i.e. for distribution, marketing). Likewise, SBB may demonstrate that its conduct produces substantial efficiencies which outweigh any exploitative effects on consumers, such as technical improvement in the quality of the cable network, provided the price increase was indispensable for realization of those efficiencies. According to the media reports, SBB`s explanation in the pre-investigation phase was that price increase was caused by an increase in number of channels, which the Commission apparently did not find convincing. The burden of proof for providing the objective justification is on SBB.

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[1] See The Antitrust Prohibition of Excessive Pricing, David Gilo and Yossi Spiegel, 2017, page 2.

[2] Judgment of the Court of 14 February 1978, United Brands Company and United Brands Continentaal BV v Commission of the European Communities, Chiquita Bananas Case 27/76.